ET Now caught up with Rakesh Jhunjhunwala, Partner, Rare Enterprises, for his take on the current market scenario as well as what will drive the Indian markets further. Excerpts:

ET Now: What is your take on the current situation of the market?

Rakesh Jhunjhunwala: I am not surprised as December 20 of 2011 is still the 52-week low. There is hope in the market that the government will finally act. Interest rates worldwide are at extremely low levels. So money being cheap, there is some kind of confidence in Europe that at least no country is going to leave the Eurozone for the next six months.

We do not know beyond that. China is expected to grow better and the American economy is also showing some signs of recovery and here the markets are anticipating that now the interest rate cycle has turned. We are going to have lots of interest rate cuts next year. Despite all the pessimism, the market is performing extremely well with very good breadth and all technical indicators are extremely positive. It has always surprised me as it has risen in the last two, three months and it just refuses to correct.

ET Now: Do you think we have all the ingredients of a new bull market in making?

Rakesh Jhunjhunwala: We have two of the three ingredients. One is utter pessimism and the interest rate cycle turning. I do not know how good earnings growth will be. If earnings growth turns out to be good, then surely we could be at the beginning of a good market.

ET Now: Apart from earnings, what else could lead the next bull market?

Rakesh Jhunjhunwala: What is more important in the earnings is the consistency of growth. If next year we get 15-16% returns and if by June, July or August, there is consensus that the year after will see another 15-17% rise, then the markets will perform very well.

ET Now: Is there a case for a strong PE extension for the Indian markets?

Rakesh Jhunjhunwala: If money flows through, PE will expand and India has had a higher PE than most Asian countries, except Japan. So there could be consistency in earnings. The early signs surely say that if the interest rate cycle decisively turns, then that will also eat earnings growth. Today the market consists of two different markets. There are 40-50 large cap scripts whose PEs cannot expand. Then there is one cycle, where there is humongous scope for PE expansion. So, both could meet at some point.

ET Now: When do you think the Indian markets will convincingly break out of this four-year trading range?

Rakesh Jhunjhunwala: It could be next year. If the Nifty peak has been 6300 and if the markets go to 6700-6800 and do not go below 6300, then that is a sure sign that a new bull market is in the offing. But that will take time. It may cross 6200-6300, but crossing 6200-6300 is a long process.

ET Now: The big event in the next 12 to 18 months is that we have a general election. Do you think for the real bull market to start, we need a stable government in place?

Rakesh Jhunjhunwala: It will depend on what the election perceptions are and how the situation internationally is. If the perception of the election is that a favourable government will come, the markets will discount that kind of a government even before the election results.

ET Now: What do you make of the verdict of the Gujarat election?

Rakesh Jhunjhunwala: As expected. One thing is very interesting in Gujarat that they have won 80% of seats in urban areas and lost 80% of the seats in rural areas.

ET Now: What kind of implications will it have?

Rakesh Jhunjhunwala: There is a different conceptualization about what people want in rural areas and what people want in urban areas. In rural areas, there is aspiration and those who have fulfilled the aspirations of a better quality of life are the ones who are going to get re-elected. It is not going to happen in a day, but more and more people are going to vote based on not on caste but on the basis of which parties or which leader they feel can help them fulfil their aspirations.

I do not think that the aspirations are in terms of subsidies, job opportunity, education or infrastructure. It is still a slow process. I may be wrong, but if it happens, it is an extremely important step.

ET Now: Experts are of the view that in the light of what is happening to Brazil, China or Russia, the Indian markets are clearly standing out. What is your take on that?

Rakesh Jhunjhunwala: India's growth and the growth of other countries is complimentary. So I am not any expert on Brazil, China and Russia, but I do not see any reason why they should deteriorate further. In my mind, China should go up. China should recover.

ET Now: Could that have an impact on global liquidity?

Rakesh Jhunjhunwala: There is a lot of money globally. So in front of BRICS nations, the growth is complimentary. It is not as if they can grow and we cannot or we can grow and they cannot.

ET Now: Do you think in the next three years, the decoupling theory will only get more and more pronounced?